Bloomberg News

Oil Industry May Invoke Trade Law to Challenge U.S. Export Ban

November 06, 2013

Hydraulic Fracturing

Advances in techniques such as hydraulic fracturing, known as fracking, and horizontal drilling have sparked a boom in production. Photographer: Julia Schmalz/Bloomberg

The U.S. oil industry, riding a domestic energy boom, is preparing to challenge restrictions on crude exports, possibly by arguing that limits designed to keep petroleum in America may violate international trade rules.

“Export issues are something we’re going to have to address,” John Felmy, the chief economist for the American Petroleum Institute trade group, said in an interview. “It’s a debate we have to have.”

He declined to discuss lobbying strategy or trade rules, though a June planning document on API letterhead obtained by Bloomberg News says the group has begun to develop “the necessary legal analysis” to support export approvals.

API is planning to “highlight potential violations of the World Trade Organization rules against export restrictions,” according to the draft document, prepared for the group’s executive committee meeting.

Industry officials say the push is just starting to lift the 1970s-era restrictions, and they acknowledge it will be an uphill fight that raises sensitive political issues. The U.S. is producing more oil than it has in nearly a quarter-century, though, reducing its reliance on imports and putting the nation closer to energy independence than it has been since 1989, according to the Energy Information Administration.

Reid Porter, a spokesman for the Washington-based API, said he wouldn’t comment on specific strategies, though he confirmed the group supports lifting export restrictions.

“Supporting the free market and supporting open trade is a key priority for our industry,” Porter said. “It creates efficiencies, creates jobs, and increases revenue to our government.”

Lobbying Spending

The document indicates that the industry is more focused on protecting tax breaks as Congress considers a tax-code overhaul than on export restrictions. The organization spent about $6.7 million on lobbying for the first nine months of the year, according to public documents.

Still, removing trade restrictions is rising on the industry’s list of priorities as U.S. production soars, said Stephen Brown, vice president and counsel for federal government affairs at Tesoro Corp. (TSO:US), a San Antonio-based oil refiner that is not a member of API.

“It’s time it gets a full airing,” Brown said in an interview.

The push represents a shift in the U.S. energy policy that since the oil embargo imposed by Arab nations in the 1970s has focused on reducing imports from places like Venezuela and Russia. The U.S. still imported about 11 million barrels a day of crude oil and refined products in 2012.

Fracking Boost

Advances in techniques such as hydraulic fracturing, known as fracking, and horizontal drilling have sparked a boom in production. The International Energy Agency in Paris predicted last year that the U.S. would overtake Saudi Arabia by 2020 as the world’s largest producer.

Natural gas production has pushed prices for that fuel down and led to a flurry of applications to the U.S. Energy Department from companies seeking permission to export a liquefied form of the fuel to gas-thirsty markets such as Japan.

The department has approved four applications to construct export terminals to sell natural gas to countries -- permission that is necessary to export to nations that don’t have free trade deals with the U.S. The department is considering another 20 applications.

Constraints on crude oil exports are governed by a different law and date to the 1975 Energy Policy and Conservation Act, enacted in the wake of the Arab oil embargo.

‘National Interest’

With few exceptions, that measure prohibits exports unless the U.S. Commerce Department finds those shipments to be “consistent with the national interest.”

The restrictions apply to crude oil, not refined gasoline or related products.

The U.S. exported about 2.6 million barrels of refined petroleum products a day in 2012, more than double what it exported in 2007, according to EIA data.

Some companies are setting up small refineries to process certain grades of crude to qualify as refined so that they can be exported, Bloomberg reported in February.

The U.S. produced about 6.5 million barrels a day on average in 2012. In August, production had risen to 7.5 million barrels per day.

Refinery Capacity

Without additional exports, oil production may soon exceed the capacity for the type of light sweet crude being produced in North Dakota and elsewhere in the U.S., said Kevin Book, managing director of ClearView Energy Partners LLC, a Washington-based consultancy group.

While in the short term, that means lower gasoline prices, in the longer term it hurts consumers because it will discourage U.S. production, Book said.

“Anyone who looks at this objectively can see this is something that should be addressed,” Book said.

Other analysts said exports may not be a pressing concern for producers for years.

“It really depends on how fast production would continue to ramp up,” said Andy Lipow, president of Lipow Oil Associates LLC, a Houston-based consultancy. He said a capacity crunch may not come until 2017.

Exporting oil would give producers greater ability to get a higher price for their crude.

Integrated Companies

In an interview, Harold Hamm, chief executive officer of Continental Resources Inc., the most active driller in the Bakken field in North Dakota, said export controls put producers at a disadvantage to the major integrated oil companies. Those big multinational companies can still sell gasoline, diesel or jet fuel overseas, whereas Continental’s crude is bound to the U.S. market.

“It’s an archaic law,” Hamm said at Bloomberg energy conference in Houston last month. “Closed societies don’t work.”

West Texas Intermediate crude, the U.S. benchmark price, dropped $1.25 to $93.37 a barrel for December delivery on the New York Mercantile Exchange yesterday. Brent oil, the European benchmark price, for December fell 90 cents, or 0.8 percent, to close at $105.33 a barrel on the London-based ICE Futures Europe exchange.

Neither Felmy nor Porter of API discussed whether the group would argue that U.S. restrictions on exports violate trade rules developed by the World Trade Organization, as the planning document indicates.

A country claiming harm from the restrictions would have to bring a case before the body. Gary Hufbauer, a fellow at the Peterson Institute for International Economics in Washington, said a country would likely have a strong case that the U.S. restrictions do violate trade rules.

“There is a national security exemption, but I don’t think it could be supported now,” Hufbauer, who published a paper earlier this year about natural gas exports, said. “I don’t think the arguments would prevail.”

To contact the reporters on this story: Jim Snyder in Washington at jsnyder24@bloomberg.net; Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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